Indian Economy News & Discussion - Nov 27 2017

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby A_Gupta » 27 Aug 2019 18:00

Rahulsidhu wrote:
Implicit in your post is the assumption that higher fiscal deficits will incontrovertibly lead to higher inflation. I am questioning this assumption. I have posted about this in the past as well.

Thought experiment: If there were to be a 2% GST cut across the board, what would that do to inflation? What about fiscal deficit?


So what was causing the inflation that sank UPA-2?

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby disha » 28 Aug 2019 02:37

Rahulsidhu wrote:
disha wrote:Here is the way I look at borrowings:
... Since "money" is a limited quantity, the net will be rise in interest rate for borrowings and fall in interest rates for saving...


Incorrect. Money is not a limited quantity. Neither is wealth, which is a distinct concept.

I am not trying to be snarky here. In fact, this line of thinking matches with most economists including inside the govt. and outside it. But it's wrong.


Rahulsidhu'ji, it is okay for you being snarky. Your comment without any basis comes across as facile.

In all your posts so far I have not seen a deeper analysis of the complexities both in outcome and in process(es) that supports your arguments other than the following general statements

1. Money is unlimited
2. Money should be distributed freely

Nobody is talking about wealth. Here the money we are talking about is a denominated paper backed by RBI.

Except this one, to which I whole heartedly agree:

Rahulsidhu wrote:^^ I've seen and heard the same. Which is why this was step 1 in my two step stimulus package.

A big "structural reform" would be simply for the govt. to, by policy or by law, be required to make due payments within a short, specified time frame.


And the above is not "increasing money supply", it is all about smoothening the process of goods and service transfers.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby disha » 28 Aug 2019 10:55

a_bharat wrote:
RBI maintains a huge war chest for different contingencies (currency and interest rate risks, etc.). Currently it has 7,00,000 Crores of reserves for this purpose, which is considered too much by some. Hence GOI demand for return of a big chunk of these reserves.


Let's put 7 lakh crore in words, that is converting 7,00,00,00,00,00,000 (seven followed by thirteen zeroes) -> that is 70 trillion rupees or in current exchange terms that is @ $100 billion USD.

One can understand that RBI needs to have reserves. But what is the quantum of reserves? Why would RBI along all its reserves have to have a cushion of $100 USD when the Indian economy is growing andtwo the reserve is 1-2% the size of the Indian economy.

What are the charges that RBI foresees for it to keep such a large cushion? In nutshell, for the next 12 months which monetary crises does RBI sees that it needs to use its reserves? A run on the banks by people to go with cash - that is hoard cash? Or a breakdown in exchange rate that RBI has to sell rupees to buy dollars? That is a complete loss of investment and a total collapse in goods and services within country?

That is what the ex-RBI governor Bimal Jalan led committee looked into and came back with the answer that for this fiscal, 1.78 lakh crore can be transferred to GOI*

Of course now everybody is clamoring that GOI must:

1. Put the money into banks and clean up their balance sheets
2. Pay down its existing debt (or trim borrowing)
3. Fiscal stimulus for some specific sector

--

I think GOI must definitely *not* do item #1 and #3 above. Banks should be run professionally and they do not get a free pass on their bad loans. Also giving cash to specific sector (say passenger vehicles) will only prolong the pain since the bad habits that led to a downturn in that sector do not get addressed.

Of course GOI can pay down some debt, but then debt is a rotating instrument. So GOI can pay down some higher interest debt and then take on a lower interest debt. Here the debt got circulated for better. But the debt remains.

I think GOI will spend it behind special state packages (for border states) but more importantly it must spend it behind infrastructure. GOI should go crazy building infrastructure and earmark some for social services (like affordable housing for poor, targeted education and health care).
Last edited by disha on 28 Aug 2019 12:10, edited 2 times in total.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Karthik S » 28 Aug 2019 11:14

Enough of social services, govt already is spending good amount for that. If we are to become $5T economy in just 5 years, govt needs to spend on infra that will give impetus to economic growth. Not only that, provide incentive for desi manufacturing from phones to VLCC ships, by giving very low interest rate loans to pvt parties such as L&T shipbuilding as an example. They are also huge employment generators.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Schmidt » 28 Aug 2019 11:54

disha wrote:
a_bharat wrote:
RBI maintains a huge war chest for different contingencies (currency and interest rate risks, etc.). Currently it has 7,00,000 Crores of reserves for this purpose, which is considered too much by some. Hence GOI demand for return of a big chunk of these reserves.


Let's put 7 lakh crore in words, that is converting 7,00,00,00,00,00,000 (seven followed by thirteen zeroes) -> that is 70 trillion rupees or in current exchange terms that is @ $1 trillion USD.

One can understand that RBI needs to have reserves. But what is the quantum of reserves? Why would RBI along all its reserves have to have a cushion of $1 trillion USD when the Indian economy is growing and two the reserve is 1/3rd the size of the Indian economy.

What are the charges that RBI foresees for it to keep such a large cushion? In nutshell, for the next 12 months which monetary crises does RBI sees that it needs to use its reserves? A run on the banks by people to go with cash - that is hoard cash? Or a breakdown in exchange rate that RBI has to sell rupees to buy dollars? That is a complete loss of investment and a total collapse in goods and services within country?

That is what the ex-RBI governor Bimal Jalan led committee looked into and came back with the answer that for this fiscal, 1.78 lakh crore can be transferred to GOI*

Of course now everybody is clamoring that GOI must:

1. Put the money into banks and clean up their balance sheets
2. Pay down its existing debt (or trim borrowing)
3. Fiscal stimulus for some specific sector

--

I think GOI must definitely *not* do item #1 and #3 above. Banks should be run professionally and they do not get a free pass on their bad loans. Also giving cash to specific sector (say passenger vehicles) will only prolong the pain since the bad habits that led to a downturn in that sector do not get addressed.

Of course GOI can pay down some debt, but then debt is a rotating instrument. So GOI can pay down some higher interest debt and then take on a lower interest debt. Here the debt got circulated for better. But the debt remains.

I think GOI will spend it behind special state packages (for border states) but more importantly it must spend it behind infrastructure. GOI should go crazy building infrastructure and earmark some for social services (like affordable housing for poor, targeted education and health care).



--------------------------------------------------------------

Sorry to nitpick , but 7 lakh crore is 7 x 10 power 12 INR , equals 100 billion usd , not a Trillion USD

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby disha » 28 Aug 2019 12:11

^Thanks. I corrected my post. I was afraid that I might have added a zero in the original 7x10^12 figure. But did not realize that the conversion rate of INR to USD was messed up! :-(. All the zeroes I ate somewhere got regurgitated here in rupee conversion...

And Karthik'ji, yes I also agree that building up infrastructure should be the impetus. At the same time, I am reminded about Modi's promise to bring water to every household and his plan to spend 3.7 lakh crore there.

I think by 2025, India will be transformed!

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby a_bharat » 28 Aug 2019 12:41

disha wrote:That is what the ex-RBI governor Bimal Jalan led committee looked into and came back with the answer that for this fiscal, 1.78 lakh crore can be transferred to GOI*

Of course now everybody is clamoring that GOI must:

1. Put the money into banks and clean up their balance sheets
2. Pay down its existing debt (or trim borrowing)
3. Fiscal stimulus for some specific sector


IIRC, of the 1.78 Lakh Crores, about 90,000 Crores were already anticipated and taken into consideration in the budget. In addition, the tax collection is falling short of budget expectations, though the FM says the tax collection objectives will be met.

FM announced that the 70,000 Crores for bank recapitalization will be released at once (she also mentioned a figure of 5 Lakh Crores in this context; not sure what it is). This 70,000 Crores was already in the budget. Per FM, there is enough liquidity in the banks, but loan approval decisions were slow due to recent banking scams.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Suraj » 29 Aug 2019 03:44

vijayk wrote:I read about this a lot. Still can't figure our where RBI got all this surplus.

Here's a summary of how things are. RBI earns from multiple sources. RBI's own fiscal year (Jul-Jun) doesn't match GoIs (Apr-Mar). For Jul18-Jun19, its balance sheet was Rs 40.49 lakh crore, up 11% from 2017-18's Rs 36.17 lakh crore, which again was 9.5% up from the year before it. These assets consist of gold coin/bullion, foreign currency assets (currently ~$430 billion or about Rs 30.5 lakh crore), gains from investment in govt securities, as well as loans and advances.

When it reports a balance sheet, the liabilities side is composed of multiple components that comprise RBI's capital reserves, which it uses to manage any monetary or liquidity crisis on its own:
* currency and gold revaluation account (CGRA),
* investment revaluation account,
* asset development fund (ADF) and
* contingency fund (CF)
After meeting its own opex, and accounting for reserve levels as established by committee (such as the latest Bimal Jalan one, which the RBI accepted in full), RBI transfers the extra surplus to GoI. Most of its income goes into the CF and ADF (asset development fund, which funds entities like National Housing Bank, NABARD, SIDBI).

The CF is about 6.8% of this balance sheet. The CF is set aside for meeting unforeseen contingencies like a drop in value of securities or risks in monetary policy actions. Bimal Jalan committee prescribes CF of 6.5-5.5% of balance sheet. RBI accepted the lower band of 5.5%, and thus transferred the difference between 6.8% and 5.5% (Rs.52637 crore) to GoI . At the current 5.5% level, the CF will be ~Rs 2.25 lakh crore.

CGRA consists of gains or losses in foreign exchange reserves, and this item has grown significantly in recent years, CAGR of 25% since 2010 to Rs 7.3 lakh crore in 2018-19. CGRA+CF constitute the overwhelming majority of RBI's capital reserves. The Bimal Jalan committee recommends that RBI's capital reserves be between 24.5% and 20% of balance sheet. I don't have access to RBI's website now, so I can't tell, but this number should be around 24% right now, and was 26.5% last fiscal.

Now the question of the larger than typical dividend. Usually RBI transfers about 50-60K crore as dividend to GoI each year. This time, it is much more due to additional income from OMO market intervention and dollar selling to manage currency exchange rate volatility. With RBI continuing to be accommodative (i.e. bond buying, therefore earning interest), its balance sheet will keep growing.

Another question is that of the mechanism of transfer of surplus to GoI. In my opinion, there was a lack of a clear policy based threshold definition based on which RBI could determine the quantum of transfers, and a lack of agreement on which to do this. The Jalan committee fixes some of these at least, by recommending particular thresholds, which RBI has accepted. Now the next issue is that of special surplus transfers. Ideally RBI and GoI would agree upon a quarterly or half yearly transfer schedule. I think that would suit GoI more than once a year transfers.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Rishirishi » 29 Aug 2019 04:42

Will this have the same effect as printing money.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby vijayk » 29 Aug 2019 06:36

https://www.financialexpress.com/econom ... s/1687622/
Economic slowdown not as bad as shown; some products not selling because people buying other items
By: Samrat Sharma | Published: August 27, 2019 4:34:05 PM
Preferences of the consumers are changing from high-end branded products towards good quality products of small companies which are not listed.

The Indian economy is evidently going through a slowdown, mainly driven by the lack of demand in the rural heartland. Wage growth, per capita income and household savings are affected but is the slowdown being exaggerated? Moving slightly from the macroeconomic picture to the structural shift of consumer choices and preferences, a recent research note by SBI shows that the preferences of the consumers are changing from high-end branded products towards good quality products of small companies which are not listed. The behavioral pattern of consumers is leaning more towards herbal and Ayurveda oriented personal care products, presently being made in the unorganised or small business segments which are not formally captured by the data survey teams and this could also be one of the reasons for a downward bias in the data.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby arshyam » 29 Aug 2019 06:55

This ET article summarizes it well:

Battle over reserves: Here's how much money RBI sits on, can part with and how it builds the funds

The total reserves with the RBI stand at Rs 9.6 lakh crore, up from Rs 8.38 lakh crore in F17. The RBI reserves are divided under several heads. It holds contingency fund worth Rs 2.32 lakh crore, up from Rs 2.28 lakh crore in FY17. Under currency and gold revaluation account, the RBI holds Rs 6.92 lakh crore, up from 5.3 lakh crore in FY17. It has 0.23 lakh crore under asset development fund, same as in FY17. Under investment revaluation account for rupee, it holds Rs 0.13 lakh crore, down from Rs 0.57 lakh crore in FY17.


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Re: Indian Economy News & Discussion - Nov 27 2017

Postby yensoy » 29 Aug 2019 07:31

Rishirishi wrote:Will this have the same effect as printing money.


While RBI's transfer to the GoI treasury would mean that GoI is free to spend it as it feels, superficially that would be akin to the good old days when the government freely printed money which it then spent.

However, a sizeable portion of the transfer will be used to recapitalize banks. These banks which are for one reason or the other, bankrupt in some sense - mainly due to profligate lending and non-recovery of loans. In other words, the money has already been spent or frittered away (case in point a flock of Kingfisher jets parked at Chennai airport midfield). So the recapitalization will not really have the effect of money being printed - however it is precisely to make up for money which was printed and pissed away in the past. It's the recovery from hangover.

Yet, with more money in the system and due to the pressure on the GoI to recover the economy, banks will be "encouraged" to lend again, which may see some inflationary effects.

Inflation is not necessarily a bad thing. As bad as inflation is, deflation is much worse. Deflation chokes the economy like nothing else - when people feel they can save money by putting off purchases, they do exactly that.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Suraj » 29 Aug 2019 10:18

Steel output for the year to date remains robust, up almost 5% until July to 67MT, second after PRC. Japan is 3rd with 59MT. India produces more steel than all of former USSR combined, and almost as much steel as all of North America (US+Canada+Mexico = 70MT). By next year India should be producing more steel than all of North America, and in about 5 years, probably more steel than all of EU combined.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Karthik S » 29 Aug 2019 11:21

Thanks for very informative post Suraj.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby vijayk » 29 Aug 2019 16:16

https://www.financialexpress.com/opinio ... d/1559308/
Global oil games: India playing a shrewd hand

The country is ensuring its growth story is not hampered by lack of energy

With deep sectarian Shia-Sunni divisions polarising countries in West Asia, US President Donald Trump’s bid to isolate Iran by imposing sanctions on Tehran’s export of oil and the emergence of the US as a major oil producer has changed the landscape of the oil industry in a manner that was unthinkable earlier.

At the India Energy Forum last year, Saudi foreign minister Khalid al-Falih praised PM Narendra Modi for making it easier to do business in the country and reassured New Delhi that Saudi Arabia was ‘committed to meet any shortfall that may arise due to sanctions on Iran.’ This was followed up by a meeting between PM Modi and Saudi Crown Prince Mohammed bin Salman on the sidelines of the G20 Summit in Buenos Aires. The result of such efforts is that the fall in Iranian oil exports to India has so far been successfully offset by an increase in Saudi oil exports.

Also read: Growth is a five-day match affair, hitting out wildly in the 20-over format will exhaust policy options

But maintaining regular oil supply is just one of India’s concerns. Another key area for Delhi to focus on is setting up of large-scale refineries to process crude oil. The government has made a move in this direction by involving Saudi Arabia and the UAE in developing an integrated refinery and petrochemicals complex at Ratnagiri in Maharashtra. A MoU to this effect was signed by Saudi ARAMCO and the Abu Dhabi National Oil Company (ADNOC) to jointly develop the Ratnagiri Refinery & Petrochemicals Ltd (RRPCL). Once finished, RRPCL will be capable of processing 1.2 million barrels of crude oil per day (60 million metric tonnes per annum) and will rank as one of the world’s largest refining and petrochemicals projects.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby vijayk » 29 Aug 2019 17:07



very good insights by Surjit Bhalla


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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Rahulsidhu » 30 Aug 2019 05:42

disha wrote:
In all your posts so far I have not seen a deeper analysis of the complexities both in outcome and in process(es) that supports your arguments other than the following general statements

1. Money is unlimited
2. Money should be distributed freely


I feel this is unfair. In many of my posts I have alluded to the risks/limits of the loose policies that I am advocating -- namely inflation and widening CAD. I also linked to a very nice introductory paper on the nature of money earlier. Beyond that, I am not what you expect. I am not here to write a textbook.

The ideas which you are hearing from me are not original or new. In fact they go back many decades (see: https://en.wikipedia.org/wiki/Functional_finance) and have a huge amount of academic literature.

Nobody is talking about wealth. Here the money we are talking about is a denominated paper backed by RBI.


Yes, I realize that. But you're missing the point. I mentioned wealth since wealth and money are linked.

It should be obvious that creating money (financial capital) in a modern economic system is much easier (literally can be done at a stroke of the keyboard) than creating real wealth, which takes work. What we all would like is for real wealth to be created, irrespective of how much money is created.

But in a modern economy, creation of money must precede creation of wealth. As examples think of silicon valley startups that raise massive funding before breaking even. Or, in India, a company like Jio, which raises a lot of money before offering great/cheap services and creating real wealth.
Money is like the life blood of the economy which allows it to function. Too little money creation artificially constrains real wealth creation. This is where the Indian economy is at, in my view.

A high growth rate is not just something theoretical or only for stock market investors. The people with the most to benefit are the huge numbers of youth - in my experience some of the most talented and hardworking in the entire world- who stand to gain quality employment. Think of the families who will be able to come out of destitution as their young ones enter the formal economy. With India's youth bulge, it is absolutely imperative that we optimize for high growth and quality, formal sector jobs than anything else. The big opportunity is passing us by.
Last edited by Rahulsidhu on 30 Aug 2019 06:53, edited 1 time in total.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Rahulsidhu » 30 Aug 2019 05:45

question worth asking re: RBI reserves -

Is the RBI like a "normal" bank? Can it go bankrupt? If yes, how, and if no, what are these reserves for?

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Suraj » 30 Aug 2019 07:11

RBI's reserves are effectively sovereign guaranteed. It's been argued by Vidur on the strat thread that 25% of balance sheet as extraordinarily high even for a private bank, much less RBI, which is just an arm of the GoI, created by an Act of Parliament.

GoI has made a similar case that such a large cash reserve is unnecessary, but it's also the case that there's no statutory or even GoI-RBI committee based agreement on what should be a good figure. Going solely by cash reserve as percentage of balance sheet:
‘RBI reserves ratio among the highest’
Image
I haven't looked much for RBI's own detailed reasoning of which it maintains such a high cash reserve ratio.

The surplus transfers are not merely accounting gain. They're real income from expanding the balance sheet by purchasing more government securities.
How the RBI ended 2018-19 with an over ₹1.23 lakh-crore surplus
Ever since the Reserve Bank of India (RBI) announced a jaw-dropping surplus of ₹1,23,414 crore for 2018-19 (July-June accounting year), the question that has been uppermost on everyone’s mind is: how did the central bank post such a massive surplus?

In the immediate two preceding years, 2017-18 and 2016-17, the surpluses were only ₹50,004 crore and ₹30,663 crore respectively. The RBI Annual Report for 2018-19, released on Thursday, provides the answers. There are two basic reasons for the impressive surge.

First, a huge ₹28,998 crore gain from foreign exchange transactions thanks mainly to a change in accounting policy. Until last year, when the RBI sold dollars in the market (to support the rupee), the gain or loss was calculated based on the previous Friday’s market value of the dollar. This policy was changed this year to reflect the historical acquisition cost of the dollar. A rough, back-of-the-envelope calculation puts this historical cost at around ₹53. This means that, if the RBI were to sell the dollar in the market today at around ₹72, it stands to gain ₹19 for every unit it sells.

The second reason for the higher surplus is a leap in interest income which was higher by ₹32,966 crore compared to 2017-18. The RBI conducted several rounds of open market operations (OMO) last year to infuse liquidity leading to a 57% jump in its holding of government bonds.

As per estimates by SBI Research, the RBI purchased a whopping ₹3,31,100 crore net of government bonds in 2018-19 through OMOs.

Interest from bond holdings alone was higher by ₹10,375 crore while Liquidity Adjustment Facility (LAF) operations yielded another ₹1,046 crore as interest earnings.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Suraj » 30 Aug 2019 10:43

xpost from strat thread:

The previously quoted article describes the change in accounting . The CGRA portion of cash reserves are not valuation changes . They are actual currency transaction earnings . When RBI buys the dollars to keep the Rupee from strengthening they pay Rupees for it and when they sell the dollar later they get more Rupees for that when the Rupee has weakened (and it weakened a lot between 2009-2019); the accounting difference related to how to establish the buying price, because they conduct these operations continuously, all the time.

For better understanding, this is an exercise akin to reporting base price of stocks purchased when reporting sales and capital gains/losses in a personal IT return - this is not always straightforward when there are several such transactions (in RBIs case thousands) for the same equity or asset. There are rules made to identify which purchase transaction or purchase valuation to use. The rules may be accounting magic but the gains are real - it is a matter of which purchase lot you tie a sales lot to. Why doesn’t RBI just painstaking keep a record of spot prices of all its dollar buys ? Dunno. It’s not like they have to pay daytrading taxes on it like the mango man...

RBIs CGRA earnings have grown dramatically in recent years, registering 25% CAGR in the past decade to reach over 7 lakh crore ($100 billion) by end of last fiscal year. The remaining 25% of the 10 lakh crore in cash reserves are the contingency fund, the same 25% figure listed in the graph as ‘too high’ . Funny thing about the ongoing discussion on too high cash reserves is that there's another $100 billion in the story besides what people are talking about...

The actual forex reserves themselves are not part of cash reserves. They are most of what constitutes the difference between the total balance sheet of Rs 41 lakh crore and the Rs 10 lakh crore in cash reserves.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Rahulsidhu » 30 Aug 2019 11:28

Suraj, thanks for your many detailed and informative posts on this topic.

But my question is even more basic: can the RBI, which has liabilities only in rupees, and which can create rupees at will, ever go bankrupt?

Imagine there is a massive bond selloff which leads to lower asset value on the RBI balance sheet. The RBI can easily buy more bonds against fresh INR. They do this regularly, known as OMOs. This is mentioned in the graphic you posted above.

Or imagine is USD depreciates massively, say 20% vs INR. Again, the asset side will suffer. But again, they can simply buy more $. They also do this all the time as part of their FX management.

Can anyone think of scenarios where the RBI would be insolvent? If yes, then how? If no, then what is the purpose of these reserves? We can discuss and argue about the % later.

My answer is that there is a purpose, will post about it later. But I'm curious what other people think.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Suraj » 30 Aug 2019 12:52

Sure a central bank could be 'insolvent' on paper, but in the real world, the power to print money just means a series of policy actions that generate additional cash reserves. A central bank is tasked with performing mandated market intervention activities, from which it gains income. It could technically lose money on those activities, up to the point where it is running a negative balance sheet. But it's not like depositors would 'flee' and go to another central bank across the street.

The government, as the creator and guarantor of the central bank in India's case, can authorize an expansion of the balance sheet ("printing more money") that generates income, but can choose avenues that don't release that into the economic system directly, but instead capitalize debt load or liabilities elsewhere in the system. Of course, this isn't a free meal, and would result in asset bubbles, and accumulated liabilities to be paid back by future generations.

However, running a negative balance sheet - or more importantly just demonstrating loss of control over the execution of its mandate - impacts macroeconomic sentiment with regard to the ability of the government to manage economic affrairs, and central bank to manage its mandate effectively, which has larger implications.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Rahulsidhu » 30 Aug 2019 13:42

My answer is different. I don't think CBs running only domestic liabilities can be ever insolvent except if the govt explicitly wants them to and passes laws to push them into insolvency. I don't see how that would ever happen, but theoretically it's possible I guess.

This is an old paper from 2008 which tackles this question. As I remember it made some waves around that time.

https://papers.ssrn.com/sol3/papers.cfm ... id=2489665

Quoting from the paper:
As long as central banks don’t have significant foreign
exchange-denominated liabilities or index-linked liabilities, it will always be possible for the central bank to ensure its solvency though monetary issuance (seignior- age).


On the other hand

However, the scale of the recourse to seigniorage required to safeguard central bank solvency may under- mine price stability. In addition, there are limits to the amount of real resources the central bank can appropriate by increasing the issuance of nominal base money. For both these reasons, it may be desirable for the Treasury to recapitalise the central bank should the central bank suffer a major capital loss as a result of its lender of last resort and market maker of last resort activities.


So he thinks that CB issuing base money will cause inflation but treasury issuing more bonds won't? I don't really understand the rationale for this claim, but there it is. In any case we all have learnt a lot since 2008 so maybe even he would conclude differently now.

Suraj wrote:The government, as the creator and guarantor of the central bank in India's case, can authorize an expansion of the balance sheet ("printing more money") that generates income, but can choose avenues that don't release that into the economic system directly, but instead capitalize debt load or liabilities elsewhere in the system.


So far as I know, expansion of a CB balance sheet does not need to be authorized, not in India or in any country I know of. In fact such expansions happen constantly without any govt. intervention as a part of regular CB ops. Let's look at rupee M1 (a good proxy for RBI liability side)

Image

As you can see, it is constantly expanding, but inflation is not shooting up.

Let's look at the US as well

Image

Note the explosion around 2009 due to QE. Many people (myself included) predicted high inflation to follow since QE was quite an unprecedented step. However, the subsequent 10 years proved us wrong. In my case it made my rethink my understanding of how it all actually works.

Of course, this isn't a free meal, and would result in asset bubbles, and accumulated liabilities to be paid back by future generations.

[/quote]

In my view, the idea that govt. debt needs to be paid back by future generations is a major fallacy in economic thinking. Govt debt is very different from private debt. In fact it is nothing but money with some duration.

As for the asset bubbles: After 10 years of unprecedented global easing, are we in a massive asset bubble that will burst at some point? Many people do think so. YMMV.

At least the predicted inflation hasn't happened. There is a very good reason for it, but that's a topic for another time.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Suraj » 30 Aug 2019 14:30

Rahulsidhu wrote:My answer is different. I don't think CBs running only domestic liabilities

That's not quite true for the RBI :)

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby nandakumar » 30 Aug 2019 17:22

Big PSU Bank consolidation!
Finance Minister Nirmala Sitharaman today announced a big consolidation of public sector banks: Indian Bank to be merged with Allahabad Bank; PNB, OBC and United Bank to be merged (PNB will be the anchor bank); Union Bank of India, Andhra Bank and Corporate Bank to be merged; Canara Bank and Syndicate Bank to be merged. In place of fragmented lending capacity with 27 public sector banks in 2017, now there will be 12 public sector banks post the latest round of consolidation of PSU banks. The consolidation of public sector banks will give them scale, the finance minister said. Source: LiveMint.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Yagnasri » 30 Aug 2019 17:40

I am not sure I agree with it. Not good for SME borrowers and small businesses. Not going to help in reach and there may not be management. Better would have been to allow small banks continue and make the biggest 5/6 banks bigger with large capital infusion.

I am not sure how lack of competition is helpful to the nation. At least now they shall give more licences to private sector to open banks in large number.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby nandakumar » 30 Aug 2019 18:13

Yagnasri wrote:I am not sure I agree with it. Not good for SME borrowers and small businesses. Not going to help in reach and there may not be management. Better would have been to allow small banks continue and make the biggest 5/6 banks bigger with large capital infusion.

I am not sure how lack of competition is helpful to the nation. At least now they shall give more licences to private sector to open banks in large number.

I thought there is no restriction (branch licensing) as such. The new branches have to be in the ratio of 1:2:6 among metropolitan, urban and rural areas in that order or such proportion. For private banks that has been the deal breaker.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Yagnasri » 30 Aug 2019 18:24

nandakumar wrote: For private banks that has been the deal breaker.


Depends on what you want to have. I have no issues with rural branches. There is this town and rural branches are not profitable feeling. I agree. It may not be the real thing. There is a large scope in towns and rural areas for financial services. A mass based model should be quite profitable. It may not be a high fly and fashionable model. But I think it will be very profitable.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby A_Gupta » 30 Aug 2019 18:25

If financing a nation was that easy, Pakistan would not be out with its begging bowl. Only a nation with minimal economic exposure to the outside world can simply add/subtract paper currency at will. (Please note, Pakistan I brought in here as the counter-example to the facile ideas of finance being talked about here, any discussion of Pakistan belongs on other threads.)

Basically, a country at any point in time has a maximum productive potential, and the country has to live within those means. Of course, the discussion here is how to finance growth in production. But trying to outrun real productivity growth leads to NPAs, inflation, and such.

E.g., NHAI has grown into a financial mess.
https://www.moneylife.in/article/is-nha ... 58032.html

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Supratik » 30 Aug 2019 18:34

Small banks do not have economies of scale. It was OK when our GDP was small. Also these banks will continue to be public sector and I believe they are mandated to lend to SMEs.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby JayS » 30 Aug 2019 18:35

GDP number for Q1 2019 drops to 5%...!!

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Rahulsidhu » 30 Aug 2019 18:43

Suraj wrote:
Rahulsidhu wrote:My answer is different. I don't think CBs running only domestic liabilities

That's not quite true for the RBI :)


Isn't it though? What foreign liabilities do they have?

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Rahulsidhu » 30 Aug 2019 18:53

GDP Q1 comes in at 5%. It confirms what people (including on this forum) have been saying: there is a serious slowdown.

Image

All data so far suggests Q2 will be poor as well. Many are counting on a sharp Q3 recovery, but I am not so sure. Depends on policy measures.
Govt. seems much more responsive now which is good, but will they do what it takes?

I reiterate my simple 2 step stimulus package.
1) Urgently clear all outstanding dues owed by the govt and PSUs
2) BIG TAX CUTS


The right deficit to worry about - Current Account Deficit
The wrong deficit to worry about - Fiscal deficit

Question to those connected to those doing business in the Indian markets: Are you seeing things improving around you? Are sentiment and demand picking up?

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Rahulsidhu » 30 Aug 2019 19:05

Questions also need to be asked of the RBI. They are again caught off guard with their growth estimates. Yet they insist on keeping real rates at >2%, somehow claiming that a 35 bps cut will be "enough to close the output gap". Shouldn't there be some sort of accountability?

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby manjgu » 30 Aug 2019 20:27

any news on J&K bank merger??

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby vijayk » 30 Aug 2019 20:28

https://www.livemint.com/industry/manuf ... 41226.html
The iPhone’s Make in India story


In recent months, workers at an Andhra factory began testing and assembling Apple’s iPhone X, which will be sold in India first and eventually exported
India has become an important manufacturing base as Foxconn looks to diversify its operations beyond China



Bengaluru: On a steamy summer morning, dozens of buses pull up outside a cluster of low-slung, blue buildings in Andhra Pradesh. Women dressed in colourful salwar kameezes disembark, their dupatta billowing as they make their way past hibiscus bushes and posters proclaiming, “Our aim, no accident."
The night shift at Foxconn Technology Group’s mobile phone plant in Sri City is ending, and thousands of young women are punching out as others stream in to replace them. One of the arrivals is Jennifer Jayadas, a tall, slim 21-year-old who lives several miles away in a two-room hut with no running water.
After gobbling down a free breakfast of chapatti with a potato-and-pea curry, she dons a checked white hat, apron-shirt, static-resistant footwear and tiny finger gloves. Then Jayadas takes her place at a testing station where she will spend the next eight hours making sure the volume, vibration and other phone features work properly. “Smartphones used to be all made in China," she says. “Now, we make them here."

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby jpremnath » 30 Aug 2019 21:18

Indian establishment responds only to crisis...At the first signs of trouble, the standard OP for the babus and the govt is to pretend that nothing is wrong... then when things doesnt seem to change, deny outright that their policies are the problem. When the heat rises, they come up with some halfhearted measures which ensures levers of babudom's control remains. Usually these are enough for arresting slides..1991 was one such time when the usual SOPs failed.

The current slowdown is nowhere near the 1991 crisis by any measure. Yes, we are no longer the fastest growing economy and its not going to go past the 8% growth anytime in the next 5 to 8 years. The whole heartburn to claim the economy is in doldrums is because we seem to believe it is our god given right to be growing fast when the entire world is fighting their own fires. Our best years of 2002 - 2010 was a debt fuelled boom at a time when the entire world was growing like crazy. Not to mention the crazy inflation levels and asset boom which magnified peoples net worth.

Our manufacturing is crawling while Vietnam and Bangladesh is reaping the benefits of trade war. This is not because of lack of entrepreneurs, but our labour rules and cost of land are not industry friendly. Not to mention the harebrained attempts by the babudom in bringing silly license raj era back when they finally found a FM not strong enough for that post.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Rishi_Tri » 30 Aug 2019 23:18

Even if nothing happens in India, GDP growth rate shall be be 4-5 %. Evidence - Hindu Growth Rates of 70-80s. How do we increase it to 8-10% level? Time for monetary policy based action was two years ago, time for bank consolidation was five years ago. If I were FM, I shall do the following and in this order:

1. Stop the Charade - End the drama of Startup India Fund, Smart Cities Funds, Restaurants on Highways etc. Channelize those funds elsewhere.

2. Real Estate - The whole industry has been moribund, corporates have gone bankrupt, middle class is paying EMIs and Rent, RERA is biggest joke in town, and almost every property is caught in endless football between Police FIR, RERA, NCLT, SC, Government. Promulgate an ordinance, take over all the pending projects with say more than 100 units and complete. There are about 1 Million such units across the country, waiting for last stage completion - 5-10% of payment pending. Let government pump in money along with contribution from flat owners and complete the projects. Shall help people move into their homes, open up resale market, increase disposable income triggering consumption. Also, when people move into new homes they spend on interiors, appliances, furnishing etc. Multiplier effect shall be 10X times. Something like 50,000 crore spent to complete the projects from 1.76 lakh crore received from RBI shall have growth positive affect for years.

3. Defense - The projects that are waiting for funds or decisions are very well documented on this forum. Channelize 50,000 crore to those projects from the 1.76 lakh crore. Stop all imports but for munitions.

4. Aviation - Start building up of 25 airports across the country in Tier II cities at say 1000 crore / airport. Ask Airlines to prove that they do all their MRO activities in India and if not, withdraw approvals to operate.

5. Railways - Connect all the big metros with trains capable of running at 200 KMPH. The trains shall be there (Train 18, 19, 20) but how about the tracks, signalling, and other basic infrastructure. Channelize 25,000 crore to begin with. This should have started five years ago.

6. Punitive Taxation for Non Essential Imports - Why should India import non essential goods such as furniture, kitchen items, white goods, and other household goods from China and East Asia? Beats me. The free import policies have decimated the MSMEs. And MSMEs employ people in huge numbers. Increase taxes on non essential items to levels that enable MSMEs to survive, build scale, and then go outside the country.

7. Export of Textiles and Household Goods - Use the trade war between the big two to shift production from the big neighbour to India. Indian textiles are some of the best in the world, leather industry is equally strong and the country can manufacture white goods too. The potential is immense. It shall be easier for uncle to find manufacturing capacity in India versus their own. There is famous case of one US firm taking almost two years to build limited manufacturing capacity for Boots in US.

8. Automotive - Set up public utility that shall build charging infrastructure across the country for electric vehicles. You shall give impetus to firms that manufacture charging equipment (no imports), give confidence to people that electric vehicles are for real, and take it public when the volumes are high. If BPCL, IOCL can exist why can't such a firm exist. Think of it as Aramco of Electric India.

Keep 26,000 crore in pocket.

I don't think the measures being talked about right now go far enough and government is honest about economy. Government is trying to hoodwink people into thinking that growth regression is somewhat an offshoot of global headwinds. Nothing could be farther from truth. The problems are totally internal and unless there is a realization on that, I am afraid the problems shall continue. And I have been calling out these issues for last two three years.

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Re: Indian Economy News & Discussion - Nov 27 2017

Postby Supratik » 30 Aug 2019 23:25

With Jaitley becoming sick in the first half, elections and Nirmala Sitharaman being a greenhorn in finance the govt lost focus on the ball. You can't depend on babus to run the show.


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